Buying a Business - Common Visa Pitfalls
When looking at businesses in which to invest, do not forget that some businesses may not qualify for an E-2 visa. It is important to be aware of possible pitfalls. The following are some examples:
Too Much Financing
- Mr. Smith has found a gas station, purchase price $250,000, but unfortunately he only has $100,000 available. The Seller then offers to accept a $100,000 down payment and finance the rest. Mr. Smith signs a purchase contract with a promissory note for $150,000, showing the business as collateral for the loan. His E-2 visa application is refused by the Embassy based on the fact that Mr. Smith’s business does not meet the substantial investment requirement. The financing uses the business as collateral and it is 60% of the total purchase price.
- Mr. Patel encounters a similar problem. He wishes to buy a motel which includes real estate, for $800,000, with a $150,000 down payment. The contract includes a promissory note for $650,000, which at 80% of the total purchase price, is too high. The E-2 visa application is refused.
Comments: The E-2 visa regulations limit the amount of financing (borrowing) permitted. While the consular officer has considerable discretion, there are very broad guidelines. If the purchase price is between $100,000 and $500,000, not more than 25-30% financing is recommended when the business assets are used as collateral for the loan. Whether the seller agrees to finance more than 20-30%, it is not relevant to the consular officer's decision. Close attention must be paid, therefore, to how to structure the business purchase.
The Investment is Considered Marginal
- Mrs. Jones wishes to buy a florist business which has two employees, and the seller reports good profits. However, the business tax returns show taxable income of only $15,000. The seller claims that this is a cash business, and not all income is reported. The Embassy is likely to consider this a marginal investment and refuse the application, as the application will normally be judged on the profits shown on the tax returns.
- Mr. Chiu is buying a takeaway food business, which has been poorly run, and has only one employee. It is nowhere close to reaching its full potential, when its location near new office premises is taken into consideration. The tax return shows profits of less than $20,000, however. This too, stands a good chance of being considered marginal.
Comments: The visa regulations require that the investment be non-marginal, i.e. the business must generate significant employment and/or generate more than enough to support the investor and their family. For example, in Florida, average family incomes are well over $60,000 so it is advisable to look for a business which generates significantly higher profits than the average income for its owners to maximize the likelihood that an E-2 Treaty Investor visa will be granted.
In both of these situations, we would only recommend proceeding if the applicant could, in the business plan, document considerable previous business successes in the UK, or in Mrs. Jones's case, persuade the seller to provide more accurate figures for the period since the last tax return was completed.
A Passive Investment
- Mr. and Mrs. Stewart are considering purchasing a small ten-apartment complex for long-term lets. They have adequate funds to eliminate any financing problems. The complex employs only one part-time janitor who does repairs. This is likely to be considered a passive investment, i.e. not one which the owner is likely to be actively managing and developing on a day-to-day basis. Consequently the E-2 visa application is turned down.
- Mr. Hames has been a successful builder and developer in the UK. He has seen a plot of land in Florida that he would like to purchase and eventually develop for a motel and apartment complex. He has signed a contract for the purchase, but the Embassy turns his E-2 visa down as it is currently a passive investment.
Comments: The E-2 visa regulations require that the investor be actively involved in managing and developing the business. The services should be provided primarily by employees rather than the owner, whose responsibility it is to direct and develop the business. Moreover, at the time the application is made to the Embassy, the business must be close to being operational. In an apartment complex with long lets the owner may have little to do in the operation of the business on a daily basis, and little employment generated either. This is therefore likely to be considered a passive investment.
In Mr. Hames' case, he should delay a visa application until such time as he is ready to start the land development, and begin generating employment.
It is important therefore to discuss with a licensed Immigration Lawyer the details of the particular business you are interested in before signing any contracts to determine if the investment would meet the requirements of an E-2 Treaty Investor registration. Contact the Hodkinson Law Group to discuss any potential investments.